WineSleuth 11: A small fry perspective

Certain wines rise in price as others fall. That might seem odd to the casual observer. Indeed, the same brands can sell for quite different prices across a number of outlets. How can this be? Sometimes our prices seem too good to be true, other times less competitive. How can anyone make sense of it all?

In this episode of our look at the wine market, we endeavour to explain and enlighten what is going on… never easy in an ever changing sometimes opaque, sometimes out of control world.

It’s been some year. The dollar has soared. The Euro collapsed. Stock markets and bond markets have roller-coastered. Oil has collapsed. Conflicts and migrations have intensified and continue to spread. The often raucous El Niño weather pattern has finally arrived; late and weak, but still with an impact in California, Peru and Chile (and who knows where else this coming summer). Global trade endures: a recovery here a stall there… every few months a major political election somewhere and in the middle of every nuance, every tweak a human with agenda.

In the wine business sometimes price fluctuations or volatility can appear to be random, out of touch or opaque. But they aren’t.

The complex nature of the trade in international goods requires our constant attention. The resultant adjustments we make to counter changing global forces, as well as local end market financial and economic conditions are as complicated as they are transient. Those myriad forces (generally economic, but also political) have profound influences on trade and lead to some non-linear outcomes: Wines with the same price determiners having better or worse value for money than others. It’s annoying but nonetheless; a fact we have to deal with.

Supply and Demand

Political instability and global economy jitters aside, the economics of wine is not looking too good. Some have spoken about an impending (nay, occurring) wine shortage, as demand outstrips supply. We certainly had noticed and had commented previously that we do seem to have been flying through successive vintages at an accelerating rate…at a worrying rate of just more than 1 a year. It doesn’t take a mathematical genius to see that if demand doesn’t fall (or supply increase) this means we must run out. Overall, the forces acting on prices are not favourable.

Two things are certain. Production is down. Demand is up. Wine production has been falling globally, since forever. Wine Demand has risen globally since forever. The chart gives some indication but the trends continue further back in time. Prices only have one way to go in this scenario. UP. But these are macro numbers and there will be differences between types of wine.

Not all production of every wine is down: neither all demand for all wines is up. The picture is more complicated than that, of course. The rarer wines will increase the most (and have already started to do so) and the more abundantly produced wines will increase less noticeably: less catastrophically, one might say.

And, as the Rinminbi has strengthened (it’s now allowed to trade more freely), the price pressure, due to higher imports costs has worsened here in China over 2014, especially for consumers paid locally in RMB, and more especially if they want to continue consuming imported luxury goods, like wine.

It is said that some know the price of everything but the value of nothing. Creating a business that brings one into contact with buyers helps brings that notion into sharp focus.

Oversupply sends the price of wine down and reducing supply tends to make it prices rise. If consumption rates rise while production falls that can be detrimental to the wallet. That is the story of the last decade.

Also worthy of note is the fact that the cost of production can have little to do with the selling price of a product. If, generally speaking, a bottle of wine can be made anywhere for around US$10, why are some wines sold much less than this and others much, much higher?

Once supply and demand are considered, it’s easy to understand the picture. The wine world’s ‘pyramid of perceived quality’ makes for mass produced wines with enormous volumes whose returns are easier to rely upon than smaller single vineyard boutique wines: economies of scale. That goes a long way to explaining, but factors such as oak ageing, severe crop pruning, marketing, distance to market, etc, can influence the cost of production quite considerably, before we even mention import tariffs…

We do wonder how our customers feel about the consequences of supply side factors that remain complex and varied, and pretty much out of our control.

We stick to a simple model: Because we don’t undervalue suppliers or employ loss leaders that enable overcharging on other products (the supermarkets model), or sell counterfeit or smuggled wines (the dodgy trader model), we negate the ugly tactic of demonstrating value where there is none. Across the board, our message remains simple. There are a lot of crooks out there from all parts of the hierarchy pedalling rubbish on the unsuspecting and/or uncaring. We’ll leave that sort of thing to them. More on thathere.

Positive feedback of our portfolio serves to remind us we are sourcing and presenting the best wines at the most competitive prices. We also get many complimentary comments from overseas producers and suppliers, who would like to add their wines to our lists (obviously). We have to decline most offers as we seek to limit the portfolio size to maintain a small is good ethos; indeed we have to draw the line somewhere.

Despite this, we believe ours is the largest and most diverse portfolio in Shanghai, and as far as we can see, the only one that knows the irrelevance of knowing only the price of everything and the value of nothing.